This Month In Commercial Banking
Commercial deposit balances grew on average 1.1% during the third quarter, a significant turnaround from the first half of the year when the average bank saw outflows of 11%. Curinos attributes this growth to three primary factors:
- Most banks showed they were willing to use rate aggressively to retain or buy back balances that otherwise would have moved to money market mutual funds.
- Bank credit worries on the part of commercial depositors spawned by the headlines in March and April have largely subsided.
- Macroeconomic conditions improved during the third quarter, buoying total money supply.
But the quarter was not without its challenges. Beneath the growth of total commercial deposits, the shift from non-interest-bearing to interest-bearing deposits continued apace. The average ECR portfolio dropped about 5% in the quarter while the average MMDA portfolio grew by nearly 7%. This remixing of deposits, as well as continued exception pricing, pushed interest expense on the average commercial portfolio a full 25 basis points higher during the quarter (Figure 1).
Figure 1: Deposit Mix Shift Vs. Change In Portfolio Rate
According to our survey of liquidity managers at the end of the second quarter, the majority expect balances to be flat to modestly higher over the next 12 months. They’re also forecasting that their portfolio betas are near peak through the cycle.
If the data from the past three months are an indication of what’s to come, banks may be able to stabilize their levels of commercial deposit. Doing so, however, will likely increase portfolio interest expense, even if the Fed is done hiking rates for this cycle.